Journal of Energy Markets

Risk.net

Optimal management of green certificates in the Swedish–Norwegian market

Fred Espen Benth, Marcus Eriksson and Sjur Westgaard

  • Stochastic model of green certificate prices in the Swedish-Norwegian market.
  • Optimal management of green certificates for a producer of renewable power.
  • Stochastic optimal control and dynamic programming with singular controls.

We propose and investigate a valuation model for the income of selling tradeable green certificates (TGCs) in the Swedish–Norwegian market, formulated as a singular stochastic control problem. Our model takes into account the production rate of renewable energy from a “typical” plant, the price of TGCs and the cumulative amount of certificates sold. We assume that the production rate has a dynamics given by an exponential Ornstein–Uhlenbeck process, and the logarithmic TGC price has a dynamics given by a Lévy process. For this class of dynamics, we find optimal decision rules for the state variables and a closed-form solution to the control problem. A case study of ICAP prices and wind production data from Denmark backs up our model choice and shows the relevance of this pricing approach.

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